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Wednesday, November 30, 2011

Yesterday, Standard & Poor's, using its new ratings criteria, downgraded 15 big banks including BAC, C, JPM, WFC, MS, GS and BK. BAC closed at $5.08 before the announcement. U.S. index futures are currently down overnight (Emini S&P -0.86%), so we'll see if BAC trades in the $4s tomorrow.

"Following a review of Bank of America Corp. (BofA) under Standard & Poor's revised bank criteria (released on Nov. 9, 2011), we have lowered our issuer credit rating (ICR) on BofA to 'A-/A-2' from 'A/A-1'. We also have lowered our long-term ICR on its operating subsidiary Bank of America N.A. to 'A' from 'A+'. The short-term rating on the operating subsidiary remains 'A-1'."

"The negative outlook reflects our view that there are significant earnings headwinds and potentially material legal uncertainties, specifically within BofA's mortgage business, and our negative outlook on the U.S. sovereign."

On CNBC's Fast Money yesterday, Chris Whalen, Managing Director at Institutional Risk Analytics, said BofA should have the "courts appoint an equitable receiver" (read his 11/28 comment at IRA) and then break-up into five or six banks. He said he'd rather buy BAC's bonds than the stock, and his favorite big bank is U.S. Bancorp (USB). Watch the video after the jump.

"The question is what are the parents' cash needs? Does anybody want to put more capital into the parent company? No. No sane person would do that. See, I think, ultimately, that a lot of investors in our community who have big claims pending against this company -- we put out a comment yesterday that says we need an equitable receiver, we don't need bankruptcy, because the investors get stuffed, and there won't be any third-party claims. We need a receiver to sort this out, just the way we had with Stanford Group. No Bankruptcy. But we need to get this organized, get these claims dealt with, and then this company is fine. I would break it up. You could sell five, six banks out of Bank of America. They're the biggest IPOs in history." (via CNBC transcript)

In addition, this is the line in BAC's most recent 10Q (ending 9/30/2011) that everyone is talking about. Does it still apply?

"In addition, if at September 30, 2011, the ratings agencies had downgraded their long-term senior debt ratings for the Corporation by one incremental notch, the amount of additional collateral and termination payments contractually required by such derivative contracts and other trading agreements would have been up to approximately $5.1 billion comprised of $3.4 billion for BANA and $1.7 billion for Merrill Lynch. If the agencies had downgraded their long-term senior debt ratings for the Corporation by a second incremental notch, approximately $1.5 billion comprised of approximately $1.0 billion for BANA and $500 million for Merrill Lynch, in additional collateral and termination payments would have been required."

What is the real problem with today's market? Watch this excerpt from Robert Prechter's special, video issue of the August 2011 Elliott Wave Theorist. Prechter shows you how the buildup of dollar-denominated debt has brought us to what he calls a critical market juncture.

Get even more information about current market trends and how to prepare for what's ahead with our new 14-page investing report. See details below.

Fitch Ratings warned they would revise their outlook on U.S. debt to negative if the Committee on Deficit Reduction failed to reach an agreement. Today it happened. From the Fitch release.

"The affirmation of the U.S. 'AAA' sovereign rating reflects still strong economic and credit fundamentals. U.S. sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and accordingly the U.S. credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large 'AAA'-rated sovereigns. The U.S. dollar's status as the pre-eminent global reserve currency and depth of the U.S. Treasury market render financing risks minimal and underpin a low cost of fiscal funding."

"The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure of the Congressional Joint Select Committee on Deficit Reduction (JSCDR) to agree at least USD1.2 trillion of measures to cut the federal budget deficit over the next 10 years as mandated under the Budget Control Act passed in August (BCA 2011)."

Last week, JGB 5 and 10-year CDSs broke above the 10/21 highs and now look like they could test the 10/4 highs (and beyond?). What do you think, check out the charts. On Friday 11/25, JGB 5Y CDS closed at 135 basis points and JGB 10Y CDS closed at 161 bps (Bloomberg.com data). It is the cost to insure $10 million of Japanese government bonds (100 basis points = 1% per year). And on 11/25, the Japanese 10-year government bond yield completed its "biggest weekly gain since January". Watch Japanese credit data and news. Last week the IMF warned Japan about its debt load and borrowing costs, S&P warned that Japan "may be" close to a downgrade, and yesterday Bank of Japan's Shirakwa warned about the economy. Moody's downgraded Japan's credit rating to Aa3 from Aa2 in August.

David Rosenberg, Chief Economist and Strategist at Gluskin Sheff, was interviewed by Consuelo Mack WealthTrack on 11/11/2011. His view, which is nothing new, is that the U.S. is in "in the throes of a modern day depression much like Japan". Why does he think this? We've experienced a ten year period of no employment growth; the stock market hasn't appreciated in 12 years; the yield on the 3-month Treasury Bill is at one basis point (0.01%, actually closed at 0.02% on Friday); we're experiencing a "secular contraction of credit, especially in the household sector" (in the U.S. and Europe); and "deleveraging cycles can last 7-10 years".

Source: StockCharts.com

On employment and the economy, Rosenberg said they both could "start contracting in the opening months of next year". On investment opportunities, Rosenberg believes "there is a possibility Treasury yields could go lower, maybe they go to 1.5% from 2%" (10-year note yield), but believes North American corporate bonds with "decent spreads", "quality balance sheets", and risk "mispriced for the economic outlook", present an attractive investment opportunity. Oh, and he thinks MF Global might be the Bear Stearns of 2011 (more to come). And the ECB's balance sheet and euro bonds ("hitched to Germany's credit rating") will decide the fate of the Eurozone. Watch the full interview below courtesy of WealthTrack.

Saturday, November 26, 2011

Watch this rare interview with Steve Jobs in 1990 on the future of computing (hat tip Finance Trends). He was at NeXT Computer at this time after getting fired from Apple in 1985. Apple bought NeXT in 1996. During the interview Jobs discusses the transitions between spreadsheets, desktop publishing and interpersonal computing (human-to-human communication). Watch the 50 minute interview after the jump via PBS NOVA. UPDATE: I embedded another Steve Jobs interview in a 1986 documentary titled "Entrepreneurs" by John Nathan, where Jobs talks about NeXT..

Friday, November 25, 2011

Groupon is now trading below its $20 IPO price after closing at $16.88 yesterday (11/23), down 15.50% . On 11/22 it closed at 20.07, down 14.75% (previous post: Groupon Lost 14.8% Yesterday, Social Media Stocks Destroyed In November).I think GRPN's options put a spell on the stock when they arrived at the CBOE on 11/14/2011. The December GRPN 22-25 puts sold off initially when GRPN traded between 23-26.9, but then rose 102%-191% when GRPN broke down and hit a low of $16.71 yesterday (chart of Dec 23 put below). GRPN's implied volatility spiked to 123% from 80% initially (ivolatility chart below).

Groupon only offered 5.5% (35 million) of its total outstanding shares, so there is a tight float. A week before the options started trading, all of the "available" shares were used to short the stock (borrow-and-sell). I also read that due to the tiny float, brokers initially charged "an annual rate of 90 percent to 100 percent last week to borrow Groupon's stock." Then, according to Crain's Chicago Business, "the premium to borrow such shares fell from more than 90% to about 30% early this week, opening the door for short sales." It was interesting to see how it all panned out, especially after reading multiple blog posts recently on the best ways to own or short the stock. You can see that $23-$23.30 was the line in the sand and then the IPO price. Watch that steep descending channel (downtrend) and overhead resistance level (looks like $18) to see when the trend changes. By the way, Morningstar analyst Rick Summer believes Groupon is worth $8 per share. He was featured on Fox Business on 11/6, watch the video below.

Wednesday, November 23, 2011

So much is going on in Europe right now that it's hard to keep track. Here's a linkfest on the fly with a few charts (EUR/USD, 10-year German Bund yield). The 10-year German Bund yield is at 2.06%, up 7.56%, and EUR/USD is at 1.34027, down 0.46%. It was below 1.34 earlier this morning. Read the articles below and also see Eurozone PMI charts.

Stocks in Asia are lower after weak (preliminary) Chinese manufacturing data was released. The HSBC Flash China Manufacturing PMI (Purchasing Managers Index) fell to 48 in November from 51 in October, and the Flash China Manufacturing Output Index fell to 46.7 in November from 51.4 in October. Under 50 = contraction. The release said both indicators were at 32-month lows, and it opened with the headline "Chinese manufacturers report sharpest fall in output since March 2009". This is the preliminary November PMI release. The final data is published on December 1. As you can see from the PMI and Production charts, the trend is down and both are below the 2010 lows.

"Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co Head of Asian Economic Research at HSBC said: “The dipping headline manufacturing PMI implies that IP growth is likely to slow further to 11-12% y-o-y in the coming months, as domestic demand cools and external demand is set to weaken despite the still resilient new export orders. That said, as inflation is likely to decelerate at a faster than expected pace, it will leave more room for Beijing to step up selective easing measures, which should gradually filter through to keep China on track for a soft-landing.”"

Groupon (GRPN) closed at $20.07 yesterday, down 14.89% and near its IPO price of $20. When GRPN started trading on 11/4/2011, it initially popped to about $30 and then lost about a third of its value. Since 11/4, Groupon (GRPN) is down 23%, Pandora (P) is down 22.14%, LinkedIn (LNKD) is down 16.61%. Google only lost 2.71%, OpenTable lost 18.74% and Zillow got destroyed, down 29.39%. The S&P lost 5.2%, QQQ lost 5.67% and PNQI, the PowerShares Nasdaq Internet Portfolio, lost 8.38%. So, these recent IPOs/social internet companies (less Google, because of Google+?) did worse than the market and internet index on the second wave down. I found out there's a Global Social Media ETF (SOCL) run by GlobelXFunds. According to Morningstar, "SOCL holds 26 social networking, file sharing, and web-based media companies from all around the globe." I would have added Angie's List to the chart but I couldn't due to a limit.

Tuesday, November 22, 2011

At an auction today, the average yield on the Spanish 3-month T-bill spiked to 5.11%, up 122% from 2.29% at the previous auction on 10/25/2011. And the average yield on the Spanish 6-month T-bill spiked to 5.227%, up 58% from 3.30% at the previous auction. Click the links for quotes and charts at Bloomberg.com. Spain is getting squeezed.

Credit rating agencies released updates on France and the United States recently. Fitch said, if the U.S. 'Super Committee' fails to reach an agreement on deficit reduction measures, it would "most likely" result in a "revision of the rating outlook to Negative."

"Fitch Ratings-London/New York-21 November 2011: In Fitch's August 16 statement, when it affirmed the US 'AAA' sovereign ratings with a Stable Outlook, the agency commented that it would update its US economic and fiscal projections in light of the work of the 'Super Committee'. Fitch also commented that failure by the Super Committee to reach agreement would likely result in a negative rating action -- most likely a revision of the rating Outlook to Negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.

The announcement today that the Super Committee was unable to reach agreement on at least USD1.2 trillion of deficit-reduction measures underscores the challenge of securing the political consensus on how to reduce the federal budget deficit and place US public finances on a sustainable path over the medium-term. Fitch now expects to conclude its review of the US sovereign rating by the end of November." (Source: Fitch)

However, since no agreement would still force $1.2 trillion in automatic cuts, both Moody's and S&P said it wouldn't affect the U.S.'s credit rating. But if the deficit reduction plan happens to change, that could be the catalyst for more downgrades (read more at Bloomberg). Mark Zandi, chief economist at Moody's, believes "2012 is shaping up to be a very, very tough year. And in large part it's because the Super Committee decided to punt" (Fox Business). More on this in another post. The "payroll tax holiday" expires at the end of the year and emergency unemployment insurance expires on 1/3/2012.

Sunday, November 20, 2011

Here is overnight chart action for the December E-Mini S&P 500 Future and December E-mini Nasdaq Future. ES is testing the 50 day moving average and NQ is below the 50 and 200 again after failing to break above the 2011 high. NQ also pierced through the 2007 high again (support). The U.S. deficit reduction "super committee" failed to strike a deal to cut $1.2 trillion from the budget. They vote on Wednesday. Keep an eye on the credit ratings agencies to see what they think of this (BusinessWeek: U.S. Bond Risk Rises as Lawmakers Fail to Agree on Budget Cuts). Watch the NEDN video below for more information. Also, keep an eye on European government bond yields.

Thursday, November 17, 2011

Yesterday, the Spanish 10-year note yield and the 10-year Spanish-German yield spread broke out to new highs, but both reversed sharply when, according to FT and Guardian, the ECB intervened and bought Spanish bonds (which lowered the yield). The Spanish 10-year yield hit a high of 6.78%, but closed at 6.48%; and the 10-year Spanish-German yield spread hit a high of 4.99, but closed at 4.59, or unchanged after the huge intraday spike (see the chart). Sovereign debt in every euro zone country is getting attacked, but most recently in Greece, Italy, France, Belgium and now Spain. The ECB (European Central Bank) keeps buying up distressed Italian and Spanish bonds as yields keep pushing higher. Read the articles below for more information. It's hard to tell what will happen next with the ECB manipulating european sovereign debt markets, and possibly the IMF, EU and sovereign wealth funds getting involved via the leveraged EFSF plan (European Financial Stability Facility). Update (11/17/2011): Or the ECB could lend money to the IMF to bailout "even the biggest euro zone sovereigns". FYI: The Lisbon Treaty says the ECB can't buy debt directly from governments, but can on the secondary market (WashingtonPost). it is illegal for the ECB to monetizeillegal for the ECB to It's obvious though that if government bond yields keep rising, these distressed leveraged governments that can't print money, and with large amounts of debt maturing next year, will either see huge interventions or debt restructurings. Read this article by Satyajit Das at Naked Capitalism on how the leveraged EFSF and a special purpose vehicle are supposed to save Europe: Satyajit Das – Europe’s Plan To End the Debt Crisis – Putting The “Con” in “Confidence” Part 1. And as you've noticed, the balance sheets of banks, broker/dealers and funds holding European sovereign debt are directly affected. That's why people are hoping a European fiscal union gets formed so it can issue T-bonds and have a tax base.

If you think the Occupy Wall Street protests are getting bad, Russia Today has wild footage of today's protests in Greece and Italy on new austerity measures and government drama (videos below). Also read: Reforms spark riots in Italy, Greece (ABC Melbourne). Watch live footage of the Occupy Wall Street protests here. If it's possible to chart out this cycle of social volatility, which Elliott wave pattern are we in, 3 of 5?

11/17/2011: Below are two Occupy Wall Street feeds to watch. I see no teargas or flash bombs yet after they failed to delay the opening bell. The OWS movement should start their own Wall Street and have foot soldiers promote online social bank startups all over the country. Get bankrolled by Michael Moore and Russell Simmons et al.

"Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now."

"The only two guns in town, one is only theoretical, and that is increasing the size of the EFSF to 3 trillion. It should happen but it can't for political reasons. The other one, the only remaining share is the ECB. They may have to hold their noses while they do it, and if they don't do it, it's the end of the euro zone."

Tuesday, November 15, 2011

European credit markets and derivatives are volatile this morning. The Italian CDS rate is going viral on Twitter after hitting 600 basis points, a new high. Also, Italy's 10-year yield is back over 7% (Reuters). In other news, the 10-year French-German yield spread spiked 11% to 1.83. Last week on Bloomberg TV, Chris Wood of CLSA said "there is still the risk of a euro quake" and specifically said to monitor the French-German spread. Watch the interview. I also see that the 10-year Belgium-German yield spread is at 3.07, up 9.28% (h/t BI). Some boo-ya type action. Which highly leveraged bank or brokerage is the next MF Global sitting on European sovereign debt losses? FYI: There are sovereign yield spread futures for Germany-France and Germany-Italy at CME. Below are intraday charts of the spreads via Bloomberg.com and links to articles. Unicredit (UCG) is down 6.46% at 0.72 after reporting a huge loss, job cuts and a planned capital raise (WSJ).

Watch last night's Munk Debate on whether the U.S. faces a Japanese-style lost decade of high unemployment, slow growth and deflation. David Rosenberg, Chief Economist and Strategist at Gluskin Sheff, and Paul Krugman, Economist and Economics Professor at Princeton, believe this is the case. They debated with Ian Bremmer, president of Eurasia Group, and Lawrence Summers, former U.S. Treasury Secretary.

David Rosenberg during the first segment (not from official transcript)

David Rosenberg at Munk Debate

"Despite the fact that we have had 3 years of unprecedented and radical stimulus in the economy. I mean, as you've already heard we've had policy rates in the U.S. at zero. Zero percent policy rates for three years... We have had the Fed take it's balance sheet into the stratosphere. Which was once an $800 billion stable balance sheet is now $2.5 trillion. And we've had at the same time three years of government deficits in the U.S at the Federal level of over 10% of GDP. I mean, FDR never ran the deficit above 6% of GDP. For one year in the New Deal we've had three years of unprecedented fiscal stimulus. And yet what did we get out of it?... Real GDP growth of barely more than 2% at an average annual rate. Historically, what is normal in the context of a post World War II post recession recovery nine quarters in where we are today, and the answer is 5.5%."

"Our policy makers are bumping against the severe headwinds otherwise known as the debt deleveraging cycle. And also the fact that we still have a depression in housing four years after the initial detonation. But we have a consumer debt deleveraging in the United States of unprecedented proportions. We had what was a forty year secular credit expansion that went absolutely parabolic in 2002 because we had a government that believed that as an antidote to a bursted dot-come bubble we can actually save the system by engineering a financial and housing bubble. And so, that is the basic problem that we have on our hands, is, the largest component of the global economy called the U.S. household sector, 70% of GDP, is trying desperately to get out of debt..."

"So, so far the household sector has paid down or walked away from, delevered, roughly $1 trillion. And if we're talking about the concept of mean reversion, and mean reversion is very important in this business, and we're talking about taking debt/asset and debt/income ratios back to pre-bubble norms, which I believe is going to happen, you're talking about another $3 trillion of deleveraging."

How long do deleveraging cycles last?: "Working through these asset and credit cycles take seven years. So we've finished two, and I'm going to be optimistic, only 5 more to go" (he said that data was from McKinsey research)

Sunday, November 13, 2011

On 11/8/2011 (BloombergTV), CLSA Asia Pacific's chief equity strategist Chris Wood (author of the GREED and fear report) shared his views on the euro-zone crisis and what to expect going forward with the markets. Wood believes "we are in the process of reaching an end game in the euro-zone", which will end with the formation of a fiscal union forced by market pressure.

"The trend so far in this whole crisis is when the pressure gets really on, Germany agrees to more incremental moves towards fiscal union. Ultimately, I'm expecting that to be the end game. I'm expecting sooner or later the ECB to put up the white flag and engage in unsterilized monetization purchases of euro zone government debt. However, the quid pro quo for Germany will be an insistence that real fiscal safeguards are put in, European treasury set up, power to raise taxes, issue euro bonds. I believe this is the end game and the only issue is how long it takes."

In the meantime, Wood believes "there's still the risk of a euro quake that forces Europeans over this hump", which could hit risk assets (weaker stocks, commodities and euro) and force China, India and the ECB to ease and Federal Reserve to start QE3 (when dollar rises). To monitor this risk, Wood said to watch not only Italian government bond yields and its 5, 10-year yield spreads to German bunds, but also the French-German bund yield spread, which recently hit a new euro-era high. I transcribed more of what he said.

"Whether it's Italy going wrong or in due course France, that day is arriving. And the longer they take to resolve the issue the more it will cost and the more stress there will be in the interim. Clearly if the Italians get some austerity, if you get a new technocratic government, that might buy you 2-3 months of relative peace. But, I think that's the best case. Apart from looking at Italy, people also should be aware that the French bond yield over the German bund is now at euro-era highs. So I think that's as much an important variable to monitor..."

Citadel Securities, LLC will serve as the Designated Primary Market Maker (DPM) for GRPN options at CBOE. C2 does not use a DPM system.

The contract specifications for GRPN options are as follows:
Initial strike prices: 15 to 35, in $1 increments
Position limit: 200,000 contracts
Expiration cycle: January, with initial months of December, January, April and July

Wednesday, November 9, 2011

Italy's 10-year Note Yield rose 64 basis points to 7.41%, which is a new record high. It's been rising since it broke out in June-July and hasn't stopped. According to WSJ, Italy has $200 billion of their $2.63 trillion debt load maturing next year with a Debt/GDP ratio of 120%. Italian bonds are also selling off because LCH Clearnet SA, a clearing house, raised its margin rate on Italian bonds (read more at FT Alphaville). In addition, Italian Prime Minister Silvio Berlusconi offered to resign yesterday, so there is political drama as well (Bloomberg). As you can see, the Euro-zone crisis is in full effect, and everything is riding on the EU bailout plan (leveraged EFSF) to contain it.

An hour ago Ran Squawk reported that Italian CDS hit a record high at 536bps. See the CDS trend here, but it's delayed a day. The 10-year Italian-German Bond Yield Spread rose 14% to 5.67; EUR/USD is down 1.19% at 1.36615; and the December E-Mini S&P future is down 2% (via ino.com). Check out the charts below of Italian activity and the Euro/Dollar. It's getting interesting. Listen to what CLSA's Chris Wood said yesterday on Bloomberg. He thinks we're "reaching an end game in the Eurozone, but the only issue is how long it takes" (for fiscal union). He then said, "we still have the risk of a euro quake to force the Europeans over this hump." He also talked about the Fed, I will watch it again later. Zero Hedge has a post out titled: Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return"", which says the ECB will need to print euros.

Check out what's new with humanoid robot technology and artificial intelligence natural language computer systems. First, I embedded a video of a computer named Watson, designed by IBM, beating human beings (former champions I believe) at a game of Jeopardy. When asked a question, Watson's algorithms analyze relationships between words within its knowledge base (source documents), and then it ranks the best answers based on evidence. See the second video for a better understanding. People at IBM working on Watson believe it will transform the customer service, finance (banking) and health care industries.

Next, I embedded a new video of Boston Dynamic's PETMAN humanoid robot, which is essentially a terminator that can walk on a treadmill, get down on one knee, and even do push-ups. It is amazing. They need to put Watson's brain inside PETMAN's head. How will human labor survive this? I also embedded a new video of Honda's Asimo running around. Cool technology.

Monday, November 7, 2011

I found a video of Ray Dalio, founder of the $125 billion hedge fund Bridgewater Associates, giving his acceptance speech after receiving the Lifetime Achievement Award at the 7th Annual Hedge Fund Industry Awards in 2009, which is run by Institutional Investor. He first talked about Bridgewater's culture and then the hedge fund industry. He said there needs to be more "uncorrelated alpha" and less beta replication. Watch the speech after the jump. Dalio's fund performed very well this year while other large funds collapsed (as of September). Related: Dalio Returns 25% With Diversified Bets as Markets Convulse (Bloomberg, 9/7/2011); Ray Dalio On Diversified Uncorrelated Bets and How The Machine Works (BloombergTV Interview, 9/15/2011).

Ray Dalio, founder of Bridgewater Associates, the biggest hedge fund in the world with $125 billion under management (via pensions, endowments, foundations, foreign governments, central banks and other institutional clients), was interviewed on Charlie Rose on 10/20/2011 and said he's concerned about the overly indebted public and private sectors of the U.S. and Europe (debtor-developed economies) during this deleveraging period.

Dalio's main concerns are that fiscal and monetary policies are no longer affective and we're lacking the "quality dialogues" needed to deal with these issues, which ends up creating social tensions (ex. Occupy Wall Street). Watch the full interview at CharlieRose. I embedded a clip after the jump as well. Below are important quotes from the transcript (hat tip Zero Hedge). In an FT article recently, Dalio said: “Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings.” It's getting serious people.

"I think it`s important to understand that we`re going through a deleveraging. So we have to understand the big picture is -- there`s a deleveraging. Three big themes: first there`s a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other`s throats politically and globally in terms of having a problem resolving those."

"I think it`s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So that resolving the public sector debt does not resolve the problem."

"We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative."

Sunday, November 6, 2011

Nothing much has changed... The Fed is keeping rates at 0% and plans to "continue its program to extend the average maturity of its holdings of securities". Watch Bernanke's press conference after the jump (here is the transcript). If they announce QE3, which could be in the form of "large scale MBS purchases" (that was Fed Governor Daniel Tarullo's idea), then that could change the game. Here's a snapshot of the Fed's economic projections vs. June. They lowered their real GDP projections and raised unemployment rate projections.

Friday, November 4, 2011

Today, Jefferies released an update on its net exposure to PIIGS debt. The stock (JEF) is now up 1.75% on the news at $12.22 after trading down 6% earlier. After collateral calls related to european sovereign debt exposure forced MF Global to file for bankruptcy, you can see why Jefferies is disclosing this internal information to the public. They are even going to post on their website "day-end, CUSIP-level holdings in the securities of these countries" later today.

NEW YORK and LONDON, November 4, 2011 – In response to inquiries, Jefferies is disclosing its position as of a few minutes ago in the sovereign risk of the nations of Portugal, Italy, Ireland, Greece, and Spain. It should be noted that the interest-rate risk on such positions is insignificant, with DV01 equal to only $37,000.

Positions stated in USD MM’s

Long

Short

Net Cash

Futures

Net Total

Italy

2,086

(2,011)

75

(100)

(25)

Spain

191

(209)

(18)

-

(18)

Ireland

110

(80)

30

-

30

Portugal

20

(16)

4

-

4

Greece

-

-

-

-

-

Total

2,407

(2,316)

91

(100)

(9)

“These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,“ said Richard Handler, Chairman and CEO of Jefferies. “Later today, after the markets are closed in Europe and we have completed our inventory control accounting, we will post on our web-site our day-end, CUSIP-level holdings in the securities of these countries. We care for our clients, shareholders, bondholders and employees and want to allay any concern that may have arisen. As was the case yesterday, the facts about our sovereign debt exposure and other matters are straightforward and easily understood. We encourage all market participants and interested parties to review our public filings that contain extensive disclosure of the nature, extent and financing of our assets. Our firm stands on a solid foundation of over $8.5 billion of long-term capital and we look forward to continued success.”

“As is clear from this information, Jefferies has no meaningful credit risk in respect of the sovereign debt of these nations, and an insignificant risk related to interest rate movements,” said Brian Friedman, Chairman of the Executive Committee of Jefferies. “Jefferies is a leading market maker in the securities of these and other European nations, as well as a primary dealer in U.S. Government securities, and will continue to make an active two-sided market for our clients. These positions are held as inventory in the context of our market making activities and turn over frequently. Furthermore, nearly 95% of our financing of these positions is through central clearing houses.”

"Every four-to-six years throughout history we've had an economic slowdown in the United States for many many different reasons. So we're overdue, we're overdue in 2012-2013. When the next slowdown comes, what's America going to do? We cannot quadruple our debt again. We cannot print staggering amounts of money again. So the next slowdown is going to be worse than 2008, which was worse than 2002. So things just keep getting worse because the debt keeps getting higher and higher."

During the month of October, 80,000 jobs were added and the unemployment rate ticked down 0.1% to 9.0%. The U6 unemployment rate, or underemployment rate, is still high at 16.2%, but down from 16.5% in September. The market wasn't pleased about this data, or maybe it was combined with the Greek confidence vote and rise in Italian government bond yields. $SPY is down 1.61% at 124.23, pulling back at ceiling resistance; EUR/USD is down 0.58% at 1.37220; and I'm watching Jeffries Group (JEF), which is down 4.08% at 11.52 (down over 6% at one point). The one positive thing I see on the unemployment rate chart is it's been trending down since the 2009 peak.What we don't want to see is the rate spike towards 10% again during a new recession. Track the unemployment rate at bls.gov.

Chart of Unemployment Rate (BLS.gov)

Chart of Non-Farm Payrolls (BLS.gov)

"THE EMPLOYMENT SITUATION -- OCTOBER 2011

Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down.

Household Survey Data

Both the number of unemployed persons (13.9 million) and the unemployment rate (9.0 percent) changed little over the month. The unemployment rate has remained in a narrow range from 9.0 to 9.2 percent since April. (See table A-1.)" (source)

Thursday, November 3, 2011

The market is rallying on stimulative news out of Europe today. First, the ECB lowered rates by 25 basis points, which was kind of expected given the recession fears and austerity measures. In other big news, Greek Prime Minister George Papandreou called off the referendum vote on the EU bailout plan, so that uncertainty is off the table now (right?). From the New York Times:

"After a tumultuous day of political gamesmanship, Prime Minister George Papandreou called off his plan to hold a referendum on Greece’s new loan deal with the European Union, withdrew his previous offers to resign and opened talks on a unity government with his conservative opponents."

EUR/USD is up 0.92% at 1.38233 on the news and SPY (S&P ETF) is up 1.49% at 125.83. SPY is testing ceiling resistance again and is trading in a range between the 50 and 200 day moving average (red and blue lines). It is also fighting a downtrend (lower highs) as you can see, so SPY is at critical resistance levels to watch. EUR/USD ceiling resistance is around 1.40. Jefferies Group (JEF) was down 20% at one point today on European sovereign debt fears, but now it's up 1%!. All good there? All eyes are on the employment report tomorrow. ADP reported that private-sector payrolls in the U.S. rose by 110,000 in October.

Jefferies Group (JEF) is down 7% (was down 20% at one point!) on fears of its european sovereign debt exposure after MF Global went bankrupt. According to Jefferies' press release, they have "long inventory of $2.684 billion" and "offsetting short positions of $2.545 billion as well as offsetting positions in futures instruments" in European sovereign debt. They said its net exposure to Portuguese, Greek, Spanish, Irish and Italian debt was $178 million. See the statement below.

They were downgraded by Egan-Jones yesterday according to Zero Hedge: "Egan Jones Downgrades Jefferies On Concerns About Sovereign Exposure Amounting To 77% Of Equity". If gross exposure doesn't matter in this case, Jefferies went on to say its "combined net short exposure of approximately $38 million equals approximately 1% of Jefferies’ shareholders’ equity, which as previously reported is not meaningful to Jefferies’ shareholder equity." Leucadia (LUK), which owns 27.9% of Jefferies, is down 6%.

SPY (the S&P ETF) and EUR/USD made lower highs recently after the S&P posted the biggest monthly gain since 1974 (was cut short on Halloween). They both peaked out in April and have been making lower highs ever since. On 10/31/2011, exhausted SPY and EUR/USD failed at 200-day moving average resistance, broke through the steep uptrend, and re-crashed through the March and June 2011 floor (now resistance again). EUR/USD even sold through its 50 day moving average, but regained that level today on oversold conditions. SPY is still above its 50dma, but it looks testable on this down move. We'll see. The surprise plan for a Greek vote on the EU bailout was the catalyst for the sell-off.

Tuesday, November 1, 2011

The 10-year Italian-German Bond Yield Spread is at 4.52, +11%, and the 5-year Italian-German bond yield spread is at 5.27, +11.53%. Since German bonds are considered the safest government bonds in the euro zone, spreads widen when sovereign debt fears rise. I wrote about the 10-year Italian-German spread back in June when it initially broke out to new highs. The 10-year Spanish-German spread broke out in July. Watch the charts on Bloomberg.com to monitor sovereign risk in Europe. It is too bad Bloomberg.com took down down sovereign CDS quotes and charts. For a whole list of spreads to German bunds go to my post with links.

At the end of October, the market was very optimistic that the EU Summit deal reached to save Europe would go as planned. Read the full EU Summit Statement on the plan (the leveraged EFSF aka European Financial Stability Facility, 50% Greek debt haircut and austerity measures). However, now Greek Prime Minister George Papandreou is calling for a referendum (1, 2, 3, 4) that could put the EU plan at risk since 58% of Greeks (1, 2) are against the plan. This puts contagion risk back on the table again if government bond yields continue to rise, Greece defaults, and/or credit default swaps, toxic sovereign debt holdings and sovereign collateralized swaps (repurchase agreements) force collateral calls on banks and then bankruptcy filings. If the plan fails, will the ECB print euros?

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